It is well known that capital gains from the sale of a principal residence are exempt from taxes for Canadian tax residents. But can we leverage this policy to optimize taxes when owning multiple properties for investment purposes? The answer is yes.
Let’s analyze this with the following example:
In 2017, Jack purchased a condo in Toronto for $400,000 as his principal residence. By 2019, the condo’s value had increased to $500,000. Jack then purchased a detached house and decided to rent out the condo. At this point, the condo transitioned from a principal residence to an investment property.
According to Section 45(1)(a) of the Income Tax Act, Jack must declare the condo as “deemed disposed” of at fair market value in his 2019 tax return. The $100,000 capital gain accrued during his ownership as a principal residence is fully exempt from tax. Simultaneously, Jack is deemed to have repurchased the condo at $500,000 as its adjusted cost base (ACB) for rental purposes.
By 2023, the condo’s value rises to $700,000, while the detached house has not appreciated significantly. Jack decides to sell the condo but keeps the house for the time being. The condo’s total capital gain is $200,000 ($700,000 - $500,000), half of which, $100,000, is taxable. Assuming Jack earns an annual salary of $90,000, the tax rate on the additional income from the sale would be approximately 40%, resulting in an additional $40,000 tax liability for 2023.
However, if Jack had consulted a tax advisor in 2019 for tax planning, the advisor could have suggested filing a 4-Year Election (Section 45(2)). With this election there is no deemed disposition in 2019, and the condo can continue to be designated as Jack’s principal residence for up to four years after it becomes a rental (2019–2022). Together with the “plus one” year in the exemption formula, this covers every year Jack owned the condo (2017–2023), so when he sells it in 2023 the entire gain is exempt and he owes no tax on the sale.
There are trade-offs: a family can designate only one principal residence per year, so the house cannot be designated for 2019–2022 — worthwhile here because the house barely appreciated — and no capital cost allowance can be claimed on the condo while the election applies.
This example illustrates how proactive tax planning can save Jack $40,000 in taxes in 2023.
Additional Strategies to Offset Taxes When Selling Properties:
Utilizing Investment Losses
Losses from stocks or other assets can offset capital gains from property sales. Even if the losses do not impact the tax liability in the year they occur, it is essential to report them promptly to ensure they are available for future use.Maximizing RRSP Contributions
RRSPs are highly effective for reducing taxable income in high-income years or when income spikes. Proper planning with a tax advisor is necessary to utilize this tool effectively.
At Sheng Qian Professional Corp., we have extensive experience in tax planning for property ownership and investments. If you own multiple properties and want to maximize your tax efficiency, feel free to contact us for expert advice.